How Much Does Happiness Cost?

On Tuesday we took our first dive into the intersection between money and happiness. We’ll build on this foundation for the rest of May.

What we found was that some amount of money allows us to spend our way out of intense stress and unhappiness. Once we can comfortably afford the necessities – food, shelter, and safety – our happiness goes up. After that it is more of a mixed bag.

The next logical question then is: How much money does it cost to be happy?

What Is Happiness?

The cost of happiness in different studies varies greatly depending on how you measure happiness.

One measure of happiness is called “emotional well-being.” When assessing this type of happiness, researchers ask people to think back on their day or week and answer questions about how they felt.

Did you feel happy yesterday? Did you feel angry today? How many times did you feel sad in the last week? These are all questions directed towards determining your emotional well-being.

The other method measures your “life satisfaction.” Instead of asking about your day or week, researchers assessing life satisfaction ask about your, well, assessment of your life.

On a scale from 1 to 10, how satisfied are you with your life?

Both methods are considered measurements of happiness. But they result in very different data points when looking at how much happiness costs.

The Happiness Plateau?

When you measure happiness by the day or week (or even moment-to-moment) we see that happiness rises with income for a while and then largely plateaus. This means that the emotions you encounter during your life improve as you make more money. But only up to a point.

When you measure happiness by life satisfaction, there is no plateau. The people with the most money are the most happy. When looking back on their lives, the richest folks tend to be the most satisfied.

That feels like a deeply uncomfortable thing to say. We don’t like the idea of the richest people also getting to be the happiest.

But before we hang our heads in despair, let’s step back for some much-needed context.

Correlation or Causation?

There are lots of “intervention” studies that we will look at throughout the rest of the month. These are studies where researchers get participants to change their spending in some way and can then measure how it affects their happiness.

Interventions can find causal links. You are happier because you spent your money on a gift for your friend. That is the only reasonable explanation for your newfound happiness.

That is not what we are dealing with here. The big picture studies of money and happiness are looking at data and situations that already exist and trying to find patterns. These studies find correlation, but not necessarily causation.

Under a life satisfaction model, richer people are statistically happier. But it doesn’t necessarily prove that they are happier because they are rich. There could be other factors that contribute to both wealth and happiness.

Maybe people who accomplished big goals are more likely to be satisfied with their life and more likely to be rich. Maybe people who have big social networks and good relationships are more likely to be happy and also more likely to have high paying jobs based on this network.

There are all sorts of potential explanations, especially given that the different measures of happiness produce such different results.

The Cost of Emotional Well-Being

For life satisfaction then, there is no answer to the question of how much money buys happiness. The more money you have, the more satisfied you are, although we don’t know whether that is caused by the money or some other factor.

Let’s dive into emotional well-being, then, which will give us a more interesting answer.

The most detailed dive into this question was done by Daniel Kahneman and Angus Deaton in 2010. They looked at data for over 450,000 Americans and compiled some interesting findings.

The headline statistic is that a household income of $75,000 is where happiness starts to plateau. Every income step below $75,000 corresponded with a decrease in happiness and an increase in unhappiness and stress.

This $75,000 ceiling might be lower than you expected, but it is also more than most of the country earns.

Assuming this amount adjusts for inflation, we’d be looking at a household income of around $87,000 in 2017. Median household income was a bit under $60,000.

The study suggests that there is a limit to how much happiness you can buy, but that the majority of the country hasn’t hit that limit yet.

The Low Income Multiplier

One of the major drivers behind this finding appears to be that low income makes bad things worse.

Essentially, being short on cash acts as a multiplier for negative events in your life, making them hurt more. Divorce, illness, and even loneliness all affect people more negatively the lower their income.

Having less money makes the bad times much worse.

This is no small problem. We all face down times and adversity. We all deal with sadness and negative emotions. But those of us with above average incomes can get over it much more easily and get back to living a happy life. Most of the country is not so lucky.

Magic Numbers

It is also important to recognize that this is not a magic number.

There is nothing inherently special about earning $87,000 that makes life happy. You won’t find your life noticeably different when you get that raise from $84,000 to $88,000.

This finding, like the life satisfaction finding is correlational. This means that it is based on how the average American spends their money.

And if you’ve spent any amount of time in the personal finance blogosphere, you may be familiar with the fact that we don’t advocate spending like the average American.

This is not meant to be a statement of judgment towards those that don’t have the time or inclination to do the research on money and happiness. Especially for those still trying to comfortably afford food, safety, and shelter, this is not a priority and they presumably don’t have a lot of time to spare.

Instead, it is to remind you that there is nothing magic about the number that the study found. The important thing to keep in mind is that there is a point at which happiness without money is difficult.

Join the Conversation!

What have you found? Was there a dollar value that made your life happier? Was there one particular raise or promotion that pushed you over the edge? Was there a point that you recognized more money wasn’t making you happier? Let us know in the comments!

4 thoughts on “How Much Does Happiness Cost?”

  1. So agree, at a low income incremental amounts of money can make life so much easier and thus make you exponentially happier – but you get such diminishing returns as the base income increases.

    I think the figure they quote in that study sounds about right, most people would feel affluent at that level and should be able to have a comfortable life.
    Ms ZiYou recently posted…Sunday Short #7 – Blogging SlumpMy Profile

  2. I’ve heard that $75K number before and have always questioned certain aspect to it.

    1How does it take location into account? Earning $75K in NYC with a high cost of living and potentially a longer than normal commute is very different than earning that same amount in a less expensive area. I think the annual income number needs to be indexed by location.

    I’d be curious to break down the income number by how much spending makes people happy and how much saving does. Let’s say I’d be happy with my day to day spending the net after-tax amount of a $75K income. If I’m not saving anything, that would not make me happy at all.

    I find satisfaction in knowing that I’m saving towards FI. If I spend $75K, and save another $50K, I’ll be much happier than spending $75K and saving nothing. My spending today is perfectly fine for my needs. Earning more would still make me much happier as I’d be closing in on my savings goals that much faster.
    Jason@WinningPersonalFinance recently posted…Want Your Life to Be Movie Worthy? Achieve Financial Freedom!My Profile

    1. On the first point I was surprised to find that the $75,000 number applied regardless of location. I had imagined that it would have to be indexed to location, but for whatever reason the number holds steady in the study. I don’t understand why or how, but that is the finding.

      Your point on saving vs. spending is definitely interesting. Unfortunately we can only look at income and happiness with the data rather than breaking down how different types of spending (or saving) are affecting happiness. We have to assume that the people in the study are probably spending and saving in a manner similar to the average American (which means very low savings rate and a lot of unnecessary spending).
      Matt recently posted…Go To Bed. Seriously.My Profile

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